Office Midwest

The big attraction for companies, residents? Midwest downtowns

The big draw? Midwest downtowns,ph01
A rendering of the new Milwaukee Bucks arena

The big draw for a growing number of companies and residents? Busy, urban downtowns. And this trend is showing no signs of slowing in the Midwest.

Throughout the Midwest, companies are moving their headquarters to downtown office towers or opening satellite offices in the middle of busy downtowns. And the residents are following, with people of all ages choosing to rent apartments or buy condos in the center of downtown business strips.

The appeal is obvious: Residents can walk to public transportation, work, restaurants, grocery stores and entertainment options. Companies can attract and retain young talent when they offer them a downtown location.

This doesn’t mean that the suburbs surrounding these urban centers are drying up. Far from it. It just means that Midwest downtowns that were once sleepy are now bustling, with new residents, companies, restaurants and entertainment options.

This trend? It’s a good one for Midwest cities and their commercial real estate markets.

It’s a trend that’s spread to suburban communities that boast their own active downtowns. Companies and residents want to live in these areas, too.

Just look at Milwaukee. Its downtown neighborhoods are in the middle of building booms.

“Urban living is very popular right now,” said Deborah Tomczyk, a shareholder in the Milwaukee office of law firm Reinhart Boerner Van Deuren. “We’re even see it in the near-ring suburbs like Oak Creek that have their own strong downtowns. People want to live in an urban core. They want the mixed-use experience, the urban experience.”

A good example of the activity taking place in downtown Milwaukee is the Wisconsin Entertainment and Sports Center, the name, for now, of a $524 million multi-purpose athletic arena being built in downtown Milwaukee. This key project will be the home of the NBA’s Milwaukee Bucks and the Marquette Golden Eagles college basketball team.

The 714,000-square-foot arena, though, is only one component of a larger downtown project. It is just the anchor of a developing 27-acre entertainment and retail district in Milwaukee’s downtown.

“The Bucks development is a game-changer,” Tomczyk said. “It’s not just a stadium. It’s pushing the envelope of downtown further north than it ever has been. It is opening up and inviting that element of a mixed-use neighborhood into downtown.”

Milwaukee isn’t the only Midwest city that is seeing a development boom in its downtown and surrounding neighborhoods.

Just look to Missouri, where developers are building new multifamily, office and retail developments throughout the city’s downtown.

Tim Schaffer, president of AREA Real Estate Advisors in Kansas City, said that there’s little secret to why Kansas City’s downtown is thriving: People want to live in the city’s urban environment.

This is a relatively new trend. Schaffer said that from the 1970s through the first part of the 2000s, people continued to move south out of downtown and into the suburbs of Kansas City. That has now changed, with a growing number of people moving to Kansas City’s downtown areas.

“Downtown now has the highest rents for multifamily units in the whole city,” Schaffer said. “It is the go-to place for all our James Beard award-winning restaurants, for the visual and the performing arts. It’s our cultural hub now.”

Schaffer points to the KC Streetcar as a catalyst for downtown development. The light-rail system began operating in 2016 and now boasts 16 stations. The streetcar’s 2.2-mile route also connects the different neighborhoods of downtown, making it easy for people who live there, or visit it, to visit the area’s restaurants, shops, entertainment and grocers.

“There are so many assets downtown within walking distance or connected by the streetcar,” Schaffer said. “If you are downtown, there are restaurant options, entertainment options, the performing arts center. A growing segment of the population, all age groups from Millennials all the way to empty nesters, want to live in a neighborhood where they can work, they can go for culture and entertainment and they can find great restaurants.”

Schaffer said that in Kansas City, the definition of “strong” and “weak” areas are changing as the focus turns more toward the downtown. Areas that have not seen economic development during the better part of 50 years are now seeing new retail and multifamily developments, he said.

“We are seeing growth in areas that have been static for decades,” Schaffer said.

For years, the city’s East Side has seen little to now economic growth, Schaffer said. But that is changing, as economic development moves further east here up and down the northern and southern spines of the city. Infill locations in formerly neglected neighborhoods are now becoming popular, Schaffer said.

“More people want to live closer to the city,” he said. “Consequently, we are seeing apartments, restaurants and retail going into areas that have been static and depressed economically for quite some time.”

Tomczyk from Reinhart said that the downtown activity in Milwaukee is having a positive impact on the rest of the city and its suburban communities.

Of course, the downtown boom isn’t the only good news for Milwaukee’s commercial real estate market. Taiwanese electronics manufacturer Foxconn Technology Group made news last year when it announced it will build a 20-million-square-foot LCD panel manufacturing facility in nearby Mount Pleasant.

Earlier this year, the company announced that it plans to buy the seven-story office building at 611 E. Wisconsin Ave. in downtown Milwaukee, a space that will serve as Foxconn’s North American headquarters.

“The Foxconn development is the biggest single development that I’ve seen in my career,” Tomczyk said. “It has already had so many ripple effects throughout the marketplace.”

William Bonifas, executive vice president with the Milwaukee office of CBRE, said that another development providing a boost to downtown Milwaukee is the 25-story BMO Tower.

Construction began on the tower late last year and is expected to wrap in 2019. BMO Harris Bank’s Wisconsin headquarters will be the anchor tenant of the tower being developed by Irgens at the southeast corner of North Water and East Wells streets in downtown Milwaukee.

Bonifas also pointed to Hammes Company. The developer is moving from suburban Brookfield, Wisconsin, to a new building it is developing at the northeast corner of Knapp and Water streets in downtown Milwaukee. The building will serve as the developer’s new corporate headquarters.

“These are both good occurrences for downtown Milwaukee,” Bonifas said. “These will be two new Class-A office developments in the center of the city. It’s a sign of the downtown’s strength.”

Besides those two developments, though, Bonifas said that the office activity in downtown Milwaukee is mostly coming in the form of upgrades and renovations of loft-type space more than new construction.

“We are representing a number of tenants that are looking for space in the range of 35,000 square feet or so. They are open-minded,” Bonifas said. “They are looking at everything from Class-A office space to renovated loft spaces. They are all contemplating their options.”

Bonifas said that this has been a change. In the past, office clients tended to know if they wanted loft space or if they preferred more conventional high-rise spaces. Now these same clients are willing to consider a wider variety of potential spaces, Bonifas said.

But whatever the reason for this change, it has been a positive for Milwaukee’s downtown office market. Bonifas said that this sector should remain solid, if not booming, for the rest of this year and into next.

Bonifas said that Milwaukee’s commercial real estate market offers stability to investors. And that bodes well for the future of the city’s downtown real estate scene, he said.

“Investors have been chasing the low cap rates and interest rates and the safety of the United States real estate market for many years now,” Bonifas said. “Foreign money was looking at New York City and Chicago. That sort of forced Chicagoans to start looking at Milwaukee. It’s been a bit of a domino effect since then, as more investors look at more cities. Some of the secondary markets are rising up now in interest.”

This isn’t to say that Midwest downtowns don’t face challenges. Not all office space, for instance, is equally coveted by companies and investors.

Bonifas says that does have come concerns about the Class-B and Class-C office sector in the Milwaukee market. He points to the office building at 310 W. Wisconsin Ave., marketed as The Blue. That building, which recently sold, is about half empty as some of its former tenants move out and seek more modern space.

Bonifas wonders who will fill that space.

“There is a lot of space to fill there,” he said. “Maybe some of the people who would have gone to a loft will go back to conventional office space and do something interesting there. But it is a challenge to figure out who will rent all that space. The people who want Class-A, the accounting or law firms, will go to the new BMO building. Some of the more adventurous ones might go to some kind of loft building. I’m worried about the Class-B and Class-C market, but I’m not worried about the Class-A or B-plus market at all.”